'Kiddie Tax' Changes Make 529 Plans Better
|
TOOLBOX
   Resize
COMMENT
 Discussion Policy
 CLOSE
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Who's Blogging  |
A change in how a child's interest, dividends or other unearned income is treated makes it prudent to think of switching the assets producing that income into a tax-advantaged 529 college savings plan. Congress made the 529 permanent this year; it was set to expire in 2010.
Under the old law, parents of a child age 14 to 18 could transfer assets to an account in the child's name and count on the first $850 being tax-free. Anything more than that was taxed at a rate of 15 percent or less, rather than at his parents' rate, which can be as much as 35 percent.
Starting this year, however, children up to 18 get a tax break on $1,700 in unearned income. The first $850 is still tax-free, and the next $850 will be taxed at the rate of 15 percent or less. But anything more than $1,700 can be taxed at the higher parental rate.
Anyone with children around age 14 who had been counting on the old law should consider transferring those assets into a new 529 plan opened in the child's name. The money can't be rolled into an existing 529 plan if that plan is in a parent's name because assets, once given to a child, have to stay in the child's name to avoid questions about whether the initial gift really was a gift and to avoid any potential transfer taxes.
The child might have to sell assets from another account before putting them into the new 529. That could trigger a capital gains tax, but if the child has owned the assets for a year or more, the rate is likely to be at a child's rate of 5 percent, still less than the rate his parents would pay. Money put in a 529 account grows tax-deferred and becomes tax-free if withdrawn to pay for college. Another benefit to having a 529 college fund in a child's name: Starting this year, these funds aren't considered when applying for federal student aid.
How much a person can contribute each year varies from state to state. But to avoid federal gift taxes, each parent can contribute no more than $12,000 a year on average over five years to a 529 plan in a child's name.
